Brown's borrowing balloons to pay for tax cuts

Global squeeze

Government borrowing will more than triple in a year in order to pay for tax cuts designed to stimulate the economy and prevent a spiral into depression.

Against a backdrop of a shrinking economy this year and a growth forecast of only 1.5% to 2% in 2010 Labour’s ‘Golden Rule’ of not borrowing unless it was to invest would be shelved until the fiscal year 2015/6.

Economic forecasts were slashed to 0.75% this year and shrinkage of between 0.75% and 1.25% next year. These were revised from growth forecasts on March of 2% this year and 2.5% in 2009.

Chancellor Alistair Darling said borrowing would rise to £78 billion this year (from £43 billion), £118 billon next year (2009/10) and thereafter in successive years to £105 billion, £87 billion, £70 billon, £54 billion until a return to borrowing to invest in 2015/16.

Tax rises will follow, particularly for high and middle-income earners, in what opposition leaders called a “tax timebomb” plan.

The package of fiscal stimulus the Treasury will provide between now and April next year would be worth £20 billion, said Darling. But to pay for it public borrowing will balloon with next year’s figure of £118 billion representing about 8% of the UK’s GDP.

Darling said Britain's net debt, as a share of GDP, would increase from 41% this year, to 48% in 2009/10 and 53% in 2010/11, before peaking at 57% in 2013/14.

"These are extraordinary, challenging times for the global economy. And they are having an impact on businesses and families right across the world," he said.


Shadow chancellor, George Osborne, responded to the government's package of measures by claiming they will double national debt to £1 trillion. He said this will leave "a huge unexploded tax bombshell timed to go off under a future economic recovery".

Andrew Smith, chief economist at KPMG, says: “As the aim is to fill the hole in demand left by the credit-constrained consumer, the chancellor is right to finance the package through borrowing and to delay offsetting tax rises or spending cuts until the economy stabilises.”

But, he adds, it could have been bolder and if it fails, further measures are inevitable in March’s Budget.

“We would have preferred a £20-30 billion annual package (£16 billion next year only just offsets the previously planned fiscal tightening) and better targeted measures to put more money into the pockets of those most likely to spend it,” Smith adds.